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LTI Q1FY23 review - Confident of CY22 growth, attrition down QoQ temporarily

ICICIdirect Research 18 Jul 2022 DISCLAIMER

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The company's margin declined 130 bps QoQ due to wage hikes as well elevated visa, travel costs. LTM attrition was down QoQ temporarily.

Context:

The company’s constant currency revenues were up 2.9% QoQ (2% impact of absence of pass through revenues for Q1) while dollar revenue increased 1.7% QoQ to US$580.2 million. Rupee revenues grew 5.1% QoQ to Rs 4,523 crore. In terms of CC growth, BFSI, insurance & energy and utilities reported strong growth of 7.9%, 4.5% and 2.6% QoQ, respectively, while manufacturing reported a steep decline of 11.5% QoQ (seasonal weakness) while growth in retail & hi-tech was weak at 1.4 and 0.8% QoQ, respectively. In terms of geographies, growth in North America/Europe was strong at 5.6%, 4.1% QoQ in CC while India & RoW reported a decline of 13.4% and 1.5% QoQ, respectively (seasonal weakness in India). In terms of client profile top five customers reported strong growth of 4.4% QoQ. The company added 2118 employees in Q1, taking its headcount to 48,766. LTM attrition was down 20 bps QoQ to 23.8%. EBITDA margins were down 130 bps to 18.4% (-300 bps impact of wage hike impact,-70 bps impact of travel & visa costs, which was mitigated by +240 bps on productivity improvement and rupee depreciation.

Our Perspective:

The company's Q1 performance was largely in line on both the revenue and margin front. The company is confident of its growth in CY22 on the basis of strong client wins (four new logos of Fortune 500 won in Q1 along with four large deals of US$79 mn), which is expected to provide momentum in the coming quarters but it has a cautious outlook for CY23. LTM attrition was down QoQ (temporary phenomenon as it was aided by funding issues at start-ups) while it will take a few quarters for LTM attrition to come down meaningfully. The company has covered large base of employees (80-85%) in Q1 as far as wage hike is concerned. Hence, margins are expected to pick up from Q2 onwards. The company has seen no churn/anxiety in the upper layer of the pyramid at LTI due to merger proceedings as they have been reaching out to them to make them understand about their future career path & opportunities in the merged entity. Mindtree’s merger with the company is likely to be completed by Q4FY23. We estimate 16.1%, 16.6%, 12.6% revenue, EBITDA, PAT CAGR, respectively, over FY22-24E.

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